Announcement of firm intention of the JSE to make a
Announcement of firm intention of the JSE to make a
October 27, 2008 at 5:25 AM EDT
JSE JSE - JSE Limited - Announcement of firm intention of the JSE to make a conditional offer to acquire the entire issued ordinary share capital of the bond exchange of South Africa Limited JSE Limited (Incorporated in the Republic of South Africa) Registration number 2005/022939/06 Share code: JSE ISIN: ZAE000079711 ("JSE") ANNOUNCEMENT OF FIRM INTENTION OF THE JSE TO MAKE A CONDITIONAL OFFER TO ACQUIRE THE ENTIRE ISSUED ORDINARY SHARE CAPITAL OF THE BOND EXCHANGE OF SOUTH AFRICA LIMITED ("BESA") 1. INTRODUCTION On Friday 24 October 2008, the JSE informed the Chairperson of BESA of its intention to make a conditional offer to all the ordinary shareholders of BESA ("Ordinary Shareholders") to acquire the entire issued ordinary share capital of BESA ("the Proposed Offer"). 2. BUSINESS OF BESA BESA is a public company operating and licensed as an exchange in South Africa and specialises in interest rate products. The operations of BESA include the BESA Guarantee Fund Trust of approximately R99 million ("the Fund"). The Fund is consolidated by BESA in terms of accounting requirements, although its assets do not belong to BESA or to the Ordinary Shareholders. BESA has recently completed a rights issue to raise R81 million and, according to the circular to BESA shareholders dated 5 September 2008 ("Rights Issue Circular"), BESA's entire issued share capital following the rights issue will consist of 1 924 657 ordinary shares ("BESA Shares"). 3. RATIONALE AND BENEFITS The world of capital markets is fast changing and in response exchanges need to innovate continually to ensure they remain relevant to issuers and investors alike. It is hard to have a well-performing modern economy without a good financial system. Strong capital markets are an essential part of such a financial system, to allow participants to mobilise savings, allocate capital and manage risk. It is therefore very important from a national interest perspective that there are deep markets in debt and equity products and, as far as possible, the trading, clearing and settlement in South African financial instruments is conducted in South Africa in a globally competitive manner. This will enable local participants and the local economy to derive the benefits of a vibrant financial system. Exchanges such as the JSE and BESA face strong competition for the trade in South African instruments from both international exchanges and the over-the- counter ("OTC") market. Various market participants have indicated on numerous occasions that neither the JSE nor BESA currently offer market participants a solution that will encourage them to execute a larger percentage of their trades in South African interest rate instruments through a local exchange or local infrastructure. As a result a large proportion of trading in spot instruments continues to take place offshore, and the on-exchange trade in derivative interest rate instruments in South Africa is low by international standards. This, in turn, has negative implications for the robustness, efficiency and competitiveness of the local economy more generally. These are concerning developments for all South Africans. In common with many market participants, the JSE believes that the optimal method to improve the volumes and efficiency of dealings in South African interest rate products is through the consolidation of BESA and the JSE, which will enable the exchanges to leverage the best of what BESA and the JSE each have to offer. This consolidation will enable the exchanges to realise the following benefits for issuers, investors and market participants: improved, common risk management processes; reduction in cost through economies of scale; enhanced market model funded from existing capital without requiring participants to fund development; and increased variety of product and increased liquidity. The consolidation can be achieved through the implementation of the Proposed Offer or the acquisition of the business of BESA as a going concern by the JSE. 4. SALIENT TERMS OF THE PROPOSED OFFER 4.1 Proposed Offer and offer consideration The Proposed Offer will be made in accordance with all applicable requirements of the Securities Regulation Code on Takeovers and Mergers ("the Code") and the Companies Act 61 of 1973 ("the Companies Act"). In terms of the Proposed Offer, the JSE will offer to acquire all the BESA Shares from the Ordinary Shareholders ("the Transaction"). The Offer Consideration payable under the Proposed Offer will, subject to the price adjustment provisions in paragraph 4.2.1, be R173 219 130 ("Offer Consideration") and will be settled in cash. On the assumption that the entire issued share capital of BESA consists of 1 924 657 ordinary shares and that no options or other rights have been granted to any person for the issue of further shares in BESA, this equates to a price of R90 per BESA Share and represents a premium of 106% (or R46.37 per BESA Share) over the net asset value per BESA Share excluding the Fund and a small discount of 6% (or R5.43 per BESA Share) to the net asset value per BESA Share including the Fund as stated in the Rights Issue Circular. The Fund value has been included in determining the price of the Proposed Offer because the JSE will, on the successful implementation of the Proposed Offer, establish control over the Fund, continue to utilise the Fund for investor protection purposes and be obliged to consolidate the Fund for accounting purposes. Should the above assumption regarding the number of BESA shares in issue and/or the granting of options or rights be incorrect, the offer price per BESA share will adjust accordingly. It is the intention of the JSE to invoke the provisions of section 440K of the Companies Act should the Proposed Offer be accepted by Ordinary Shareholders holding not less than nine-tenths of the BESA Shares. 4.2 Adjustments to Offer Consideration and retention payment 4.2.1 The Offer Consideration will be adjusted under the following circumstances: 22.214.171.124 Should the net asset value of BESA, including the Fund ("BESA NAV"), at the date on which the Proposed Offer becomes or is declared wholly unconditional ("the Final Date"), be less than R170 000 000, the Offer Consideration will be adjusted downward, on a Rand for Rand basis, with the amount of the difference. The BESA NAV will be calculated in a manner consistent with the format and accounting policies applied in respect of the preparation of BESA's audited financial statements for the year ended 31 December 2007. 126.96.36.199 Should the JSE within 30 days after the Final Date find that: 188.8.131.52.1 BESA is party to any agreement of whatever nature with any third party, other than the lease agreement in respect of the premises occupied by BESA in Melrose Arch, in terms of which BESA has or will have any financial obligations exceeding R5 000 000 per annum per agreement or which will endure for longer than 3 years after the Final Date, the Offer Consideration will be reduced by the present value, calculated at a discount rate of 12.5%, of (i) the amount by which each such financial obligation exceeds R5 000 000 during the relevant 3 year period; and/or (ii) all the amount(s) payable by BESA after the expiry of the relevant 3 year period; 184.108.40.206.2 BESA is party to any agreement which contains a termination clause that will be triggered as a result of the Proposed Offer, the Offer Consideration will be reduced by the amount of any penalty and/or damages that may be payable or become payable by BESA pursuant to the enforcement of such termination clause; 220.127.116.11.3 the Fund has any outstanding tax liabilities (including penalties and interest) of whatever nature as at the Final Date, the Offer Consideration shall be reduced by the amount of such liabilities, irrespective of whether such liabilities are then due and payable. 4.2.2 The calculation of any adjustment in the Offer Consideration will be performed by the auditors of BESA at the JSE's cost within 60 days after the Final Date and the results of their findings will be disclosed to the Ordinary Shareholders as soon as reasonably possible after such results become available. 4.2.3 Notwithstanding the possible adjustment of the Offer Consideration, R105 856 135 of the Offer Consideration (or R55 per BESA Share) will be paid to Ordinary Shareholders within 7 days of the Final Date, while the balance will be retained in trust pending the finalisation of the amount of the adjustment to the Offer Consideration. The amount due to Ordinary Shareholders following the finalisation of the adjustment to the Offer Consideration (if any), will be paid within 5 business days of the auditors having made their determination, as contemplated in paragraph 4.2.2. 4.3 Conditions precedent to the Proposed Offer 4.3.1 The Proposed Offer will be subject to the fulfillment or waiver, as the case may be, of the following conditions precedent ("Conditions Precedent"): 18.104.22.168 the Proposed Offer being accepted by Ordinary Shareholders in respect of at least 50% plus one of all the BESA Shares by no later than 60 days after the date on which the offer document detailing the Proposed Offer is posted to Ordinary Shareholders ("Posting Date"); 22.214.171.124 the approval of the Transaction, to the extent required, by the Financial Services Board, by no later than 60 days after the Posting Date; 126.96.36.199 the JSE obtaining the necessary exchange control approval for the Transaction from the South African Reserve Bank by no later than 60 days after the Posting Date; 188.8.131.52 the unconditional approval of the Transaction by the competition authorities, in terms of the Competition Act 89 of 1998, by no later than 120 days after the Posting Date, and if such approval is granted subject to conditions, the JSE confirming to BESA, in writing, within 125 days of the Posting Date, that the conditions are acceptable to the JSE; 184.108.40.206 BESA has not within 60 days of the Posting Date disposed of the BESA Business (as defined in paragraph 5) to the JSE, in terms of a written sale of business agreement, which agreement - 220.127.116.11.1 has become unconditional in accordance with its terms, save for any conditions relating to regulatory approval; and 18.104.22.168.2 has been authorised or ratified by a special resolution of Ordinary Shareholders in general meeting as required by section 228 of the Companies Act; and 22.214.171.124 the Securities Regulation Panel ("SRP") approving the circular detailing the Proposed Offer. 4.3.2 The Conditions Precedent in paragraph 126.96.36.199 and 188.8.131.52 are for the benefit of the JSE and can be waived by the JSE at any time. 4.3.3 Subject to the prior approval of the SRP, the JSE shall be entitled to extend any of the dates for fulfilment of the Conditions Precedent. 5. THE POSSIBLE ACQUISITION OF THE BESA BUSINESS AS A GOING CONCERN Notwithstanding the Proposed Offer, the JSE has expressed to the BESA Board that it is the preference of the JSE to acquire the entire business of BESA (including all its assets and liabilities, as well as the Fund) ("the BESA Business") as a going concern because the acquisition of the BESA Business, rather than the BESA Shares, will significantly accelerate the ability of the JSE to integrate the BESA Business with its own related businesses, thereby bringing forward the synergy benefits and cost savings for market participants. The JSE is, however, mindful of the fact that the disposal by BESA of the BESA Business will, in terms of section 228 of the Companies Act, have to be authorised or ratified by the Ordinary Shareholders by way of a special resolution. Due to the constraints placed on the JSE by the Code, the JSE has up to the date of this announcement been unable to adequately canvas the Ordinary Shareholders to determine with certainty that there will be the requisite support for such a special resolution. The JSE has therefore elected to structure the Transaction as an offer for the BESA Shares, while creating, through the conditionality attaching to the Proposed Offer, the opportunity for the JSE, BESA and the Ordinary Shareholders to conclude and approve the acquisition of the BESA Business. 6. PRO FORMA FINANCIAL EFFECTS OF THE PROPOSED OFFER The table below sets out the unaudited pro forma financial effects of the Proposed Offer on earnings per share ("EPS"), headline EPS, net asset value ("NAV") and net tangible asset value ("NTAV") per share of the JSE, based on the audited results of the JSE and BESA for the 12 month period ended 31 December 2007. The latest interim results of the JSE have not been used, as the BESA interim results are not publicly available. If the BESA interim results become available, the pro forma effects will be calculated and released on SENS if materially different from the numbers disclosed below. The unaudited pro forma financial effects are the responsibility of the directors of the JSE and have been prepared for illustrative purposes only, to provide information about how the Proposed Offer may have affected JSE shareholders on the relevant reporting date. Because of its nature, the unaudited pro forma financial effects may not give a fair reflection of the JSE's future earnings or of the JSE's financial position, changes in equity, results of operations or cashflows after implementation of the Proposed Offer. Before the After the Change acquisition(1) acquisition(3,6) (%) (cents) (cents) EPS 321.3 317.2(4,5) (1.3%)(2) Headline EPS 292.1 275.7(5) (5.6%) NAV per share 1 302.2 1 314.5 0.9% NTAV per share 1 302.2 1 313.7 0.9% Number of 85 140 050 85 140 050 - shares in issue Weighted 85 038 891 85 038 891 - average number of shares in issue Notes: Extracted from the audited annual financial statements for the JSE Limited for the twelve months ended 31 December 2007. Balance sheet adjustments have been determined assuming that the acquisition occurred on 31 December 2007, while income statement adjustments were made assuming that the acquisition occurred on 1 January 2007. The EPS dilution does not fairly represent the effect on the JSE's earnings. BESA incurred a loss in 2007 and, based on the statement in the Rights Issue Circular, a further loss will be incurred for the 2008 financial year. This will therefore reduce both the net asset value and the negative goodwill at the date of acquisition, which is not reflected in the pro forma financial effects as they are calculated on historical results. The effect of the Proposed Offer on earnings per share of the JSE is more accurately reflected by the 5.6% dilution in Headline EPS, which excludes the effect of negative goodwill on the income statement. Income Statement Adjustments Includes 100% of the audited results of BESA for the twelve months ended 31 December 2007. Accounting for negative goodwill, computed as the difference between the purchase price and the consolidated net asset value of BESA. Accounting for interest foregone, at a rate of 10%, on the cash utilised to fund the acquisition and the resultant tax impact. Balance Sheet Adjustments Includes 100% of BESA's assets and liabilities at 31 December 2007, as extracted from the pro forma balance sheet at 31 December 2007 included in the Rights Issue Circular. 7. STAFF AND MANAGEMENT OF BESA BESA's staff is critical to its operations and the JSE is therefore committed to retaining all BESA's staff on terms and conditions that are no less favourable than those they currently enjoy should the Transaction be implemented successfully. 8. CONFIRMATION OF FINANCIAL RESOURCES First National Bank of South Africa Limited has furnished confirmation to the SRP that the JSE has sufficient resources available to satisfy full implementation of the Transaction. 9. HOLDING OF SECURITIES IN BESA Neither the JSE nor any of its directors currently hold or control any shares in BESA. 10. DOCUMENTATION AND SALIENT DATES A circular, containing full details of the Proposed Offer, will be posted to Ordinary Shareholders no later than 30 days after the date of this announcement. A further announcement setting out the salient dates of the Proposed Offer will be made in due course. Sandton 27 October 2008 Sponsor RAND MERCHANT BANK (A division of FirstRand Bank Limited) Attorneys Webber Wentzel Date: 27/10/2008 08:04:02 Produced by the JSE SENS Department.